Parametric Selection for Audit without Disclosing Parameters

PARAMETRIC SELECTION FOR AUDIT WITHOUT PARAMETRIC SELECTION FOR AUDIT WITHOUT DISCLOSING PARAMETERS By Sayyid Ali Imran Rizvi, Advocate Supreme Court Necessity of audit into a Tax-payer's income tax/sales tax/ F.E.D. affairs arises out of the fact that all the Tax-payers do not return their income truly, and some of them do file untrue particulars of their income. The ratio of such untrue declarations is the same, as is the ratio of crime in our society. As all the citizens of a country cannot be said to be criminals because some of some them commit crimes, likewise all the Tax-payers cannot be said to be tax-dodgers and liable to be treated as criminals. As an accused is a favourite child of law and he is punished only if his case squarely falls within a particular provision of Penal Code, likewise a Tax-payer guilty of tax fraud cannot be condemned merely on suspicions, and he cannot be taxed until and unless the income sought to be evaded squarely falls within a taxing provision. We do subscribe to the necessity of audit in case of untrue declarations of income, but we do agitate against the notion prevailing among the tax collectors that all the Tax-payers are the tax-dodgers, and they have unquestionable discretionary powers to pick any of them for audit, and the person arbitrarily picked up for audit has no right to agitate against his selection for audit, as the selection for audit does not cause any prejudice to the Tax-payer. While making selection for audit for the Tax Year 2015 under section 214-C of the Income Tax Ordinance, 2001, the F.B.R. gave a policy statement in the Audit Policy, 2016 that: "For the audit purposes, the selection of cases in the past was mostly through random ballot. The 'Audit Policy 2016' has proposed a paradigm shift from the past. Its focus has been realigned from random to parametric selection and from general to risk based approach." (at p. 2 of the Policy) but when the learned Commissioners Inland Revenue intimating selection of the cases for audit on the basis of PARAMETERS were requested to disclose the PARAMETERS on the basis of which cases of the tax-payers were selected, they have come forward with a reply that-- (1) the PARAMETERS are embodied in the Audit Policy, 2016; and (2) subsection (1A) of section 214-C of the Income Tax Ordinance, 2001 provides that the PARAMETERS would be kept confidential. When one lays it hands to the Audit Policy 2016, it is found that there are no PARAMETERS for selection of cases for audit in the Audit Policy, 2016 for the Tax Year 2015 available on the F.B.R.'s website, which renders a tax-payer totally ignorant of the bases of selection of his case for audit, whereas the Audit Policy 2016 clearly declares that the selection has been made on the basis of some PARAMETERS, but what they are, is not known. The learned C.I.Rs. have relied on subsection (1A) of section 214-C of the Income Tax Ordinance, 2001 for refusing to disclose PARAMETERS for selection of the cases for audit, which is un-constitutional, hence, illegal and without lawful authority for the R E A S O N S (1) that Article 19-A of the Constitution of the Islamic Republic of Pakistan, 1973 reproduced hereunder:-- "19-A Right to information.---Every citizen shall have the right to have access to information in all matters of public importance subject to regulation and reasonable restrictions imposed by law." recognises a fundamental right of this Tax-payer, being a citizen of Pakistan, to have access to the information in all matters of public importance. Selection of cases of the Taxpayers to the extent of 7.5% of the total return-filers is a "matter of public importance", hence, the Tax-payers whose cases have been selected for the Tax Year 2015 do have a right to know the bases of selection of their cases for audit, when the Audit Policy, 2016 specifically says that: "For the audit purposes, the selection of cases in the past was mostly through random ballot. The 'Audit Policy, 2016' has proposed a paradigm shift from the past. Its focus has been realigned from random to parametric selection and from general to risk based approach." (at p. 2 of the Policy) (2) That Section 24-A of the General Clauses Act, 1897 provides that "Where, by or under any enactment, a power to make any order or give direction is conferred on any authority, office or person, such power shall be exercised reasonably, fairly, justly and for the advancement of the purpose of the enactment," and the authority making any order shall give reasons for making the order. Even prior to insertion of section 24-A in the General Clauses Act, 1897, the hon'ble Supreme Court of Pakistan has always deprecated summary disposal of a lis by passing purfunctory and unreasoned orders. Reliance is placed on: PLD 1970 SC 173 wherein the hon'ble apex Court held as under:- "If a summary order of rejection can be made in such terms, there is no reason why a similar order of acceptance saying: "there is considerable substance in the petition which is accepted", should not be equally blessed." (at p. 175) In another case reported in PLD 1970 SC 158, the hon'ble Supreme Court held as under:-- "Such an order, we regret to say, does not disclose a proper application of the mind of the High Court to the merits of the case that was before it." (at p. 161) Following the above law and dicta, the Hon'ble Lahore High Court and other High Courts have also been laying great stress upon recording of reasons for an order. Some of the cases are referred to hereunder:- (a) 2005 MLD 1844 "Under law, every Court or authority dispensing judicial or quasi-judicial functions is required to give reasons in support of its decisions/orders, especially when those deprive someone of his vested rights". (at p. 1853) (b) 2005 YLR 1719 "It is pertinent to mention here that Courts insisted upon disclosure of reason in support of order on the following reasons:- "(A) The party aggrieved has the opportunity to demonstrate before the appellate, or revisional Court that reasons which persuaded the authority to reject his case were erroneous; (B) The obligation to record reasons operates as a deterrent against possible arbitrary action by executive authority invested with judicial power; and (C) It gives satisfaction to the party against whom the order is made." (at p. 1723) Despite all the above ordains of law, the F.B.R. has arbitrarily resorted to make the impugned selection without any reason whatsoever, which is utterly against the Federal Board of Revenue's own Letter C. No. 6(8) Rev. Bud/2008, dated 22.07.2008 wherein the Board has laid great stress on giving justified reasons for selection, as, according to the Board, unjustified reasons for selection 'not only defeats the spirit of Universal Self Assessment Scheme, rather affects negatively on the reforms agenda of the F.B.R.' In view of this, the F.B.R. decided that 'the officer would henceforth explain the justification for selection of cases'. The F.B.R. could have very conveniently convey the reasons of committing the Petitioner/Tax-payer's case for audit, and after obtaining the tax-payer's reply could have made a better decision as to whether audit into the tax affairs of the Tax-payer was warranted or not. Out-right selection of a case for audit not only shows the arbitrariness of the decision, but also it makes the selection for audit unreasonable, unfair, unjust, unlawful and mala fide. Selection for audit in such a manner has been deprecated by the higher judicial fora. (3) That Section 3 of the Freedom of Information Ordinance, 2002 mandates that 'no requester shall be denied access to any official record'. (4) That a learned D.B. of the hon'ble Lahore High Court has held in I.C.A. No. 116/2013, dated 23.05.2013 reported in 2013 PTD 1274 that: "21. ..... Audit Policy is a serious matter and affects a large number of taxpayers in the country. Such a policy must be open, lucid, transparent and self explanatory. We find it odd that the Audit Policy for the Tax Year 2011 is in the shape of Minutes of the Meeting of the FBR's Board-in-Council and has not been formalized into a policy document and uploaded as such on the website of the FBR. 22. FBR shall ensure that in future, the Audit Policy carrying the risk parameters and the mode and manner of segregation through risk analysis for the purposes of parametric balloting is clearly laid out in a policy document. This will help avoid litigation and will also allay the apprehensions of the taxpayers which stem from lack of openness and clarity.", but contrary to the above crystal-clear directions of the hon'ble Lahore High Court, Lahore, the F.B.R. did not make public any Audit Policy for the Tax Year 2015 prior to the impugned selection of cases for audit, which not only amounts to blatant contempt of Court, but also manifests the height of maladministration, arbitrariness, and disrespect/dis-loyalty to the law and Constitution on the part of the F.B.R. (5) That the giving of reasons is one of the fundamentals of good administration. The condition to record reasons introduces clarity and excludes arbitrariness and satisfies the party concerned against whom order is passed. To provide a safeguard against the arbitrary exercise of power by the public functionaries the condition of recording reasons is imposed on them after addition of section 24-A in the General Clauses Act. If the statute requires recording of reasons, it becomes a statutory requirement, and there is no scope for further inquiry. But even when statute does not impose such an obligation, it is necessary for quasi judicial authority to record reasons, as it is the only visible safeguard against the possible injustice and arbitrariness and affords protection to the person who is adversely affected. The reasons are the links between materials on which certain conclusions are based and actual conclusions. They disclose how the mind was applied to the subject-matter for a decision, whether it is purely administrative or quasi-judicial. They should reveal rational nexus between the facts considered and conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable. Courts insist upon disclosure of reasons in support of order on the following grounds: a) The party aggrieved has the opportunity to demonstrate before the appellate, or revisional Court that the reasons which persuaded the authority to reject his case are erroneous; b) The obligation to record reasons operate as a deterrent against possible arbitrary action by executive authority invested with judicial power; and (c) It gives satisfaction to the party against whom the order is made. (6) That the rule requiring reasons to be given in support of order is, like principle of audi alteram partem - a basic principle of natural justice, which must be observed in its proper spirit and mere pretence of compliance with it would not satisfy the requirement of law. State functionaries are expected to act fairly and justly in a manner which should not give to any one any cause of complaint on account of discriminatory treatment or otherwise. Outright selection of a case through parametric ballot without assigning any reason whatsoever is, thus, in blatant transgression of the principle of audi alteram partem, infraction whereof renders the impugned action void ab initio, illegal, and without lawful authority, as held by the hon'ble Supreme Court of Pakistan in the following cases:- (a) PLD 2008 SC 663; (b) 2007 SCMR 330; (c) 2005 SCMR 678; (d) 2005 SCMR 1814; and (e) PLD 2004 SC 441. (7) That if the learned Commissioner's logic is accepted, the F.B.R. would be equipped with unfettered discretionary powers to select any case for audit without any rhym or reason, which is against the hon'ble Supreme Court's verdict in 1997 SCMR 1804. Relevant excerpt is reproduced hereunder:- "The general principles that discretionary decisions should be made according to the rational reasons means; (a) that there be findings of primary facts based on good evidence, and (b) that decisions about the fact be made for reasons which serve the purposes of the statute in an intelligible and reasonable manner The actions which do not meet these threshold requirements are arbitrary, and may be considered a misuse of powers." [at p. 1810] "Wherever wide-worded powers conferring discretion exist, there remains always the need to structure the discretion . The structuring of discretion only means regularizing it, organizing it, producing order in it, so that decision will achieve the high quality of justice. The seven instruments that are most useful in the structuring of discretionary power are open plans, open policy statement, open rules, open findings, open reasons, open precedents and fair informal procedure. Somehow the wide-worded conferment of discretionary powers or reservation of discretion, without framing rules to regulate its exercise, has been taken to be an enhancement of the power and it gives that impression in the first instance but where the authorities fail to rationalize it and regulate it by rules, or policy statements of precedents, the courts have to intervene more often than is necessary, apart from the exercise of such power appearing arbitrary and capricious at times." [at p. 1810] The above-enunciated principle of law has to be adhered to in letter and spirit by the F.B.R. while making selection of a person or class of persons for audit, as it is the command of Article 4 read with Articles 189, 190 and 201 of the Constitution of the Islamic Republic of Pakistan, 1973, and any deviation from the law laid down by the hon'ble Supreme Court of Pakistan renders the impugned action void ab initio, illegal and without lawful authority. Selection of cases for audit through parametric ballot without any reasons is, thus, void ab intio, illegal and without lawful authority. (8) That even if the selection for audit through parametric ballot is presumed to be an executive order, it too could not be made without valid reasons. It has been held in the case reported as 2005 CLD 126 that 'public functionaries are obliged to pass the order even on the executive side with reasons'. Another judgment reported as 2003 YLR 2736 says that 'an order not containing any reasons and passed without proper application of mind is not sustainable in the eyes of law'. In PLD 2010 Lah. 230, it has been laid down as under:-- "44 the Ministry of Interior never applied its mind before placing the name of the petitioner on the ECL as the impugned order is a result of dictation from the Finance Division/State Bank of Pakistan. Discretion exercised under dictation, without reasons, based on irrelevant facts is not lawful exercise of discretion and therefore placing the name of the petitioner on the ECL in the present case shows that he has not been dealt with in accordance with law as provided in Articles 4 and 9 of the Constitution. Not to furnish reason for the decision violates the principle of fairness, procedural propriety and natural justice besides section 24-A of the General Clauses Act, 1897. The impugned Memorandum fails to meet the requirement of procedural due process.". There is no concept of "unfettered discretion" in the laws of this Land, and arbitrary exercise of discretionary power has to be struck down by the Courts as held in 1999 MLD 3001. (9) That selection of a case on the basis of unknown PARAMETERS smacks arbitrariness, which makes the selection under section 214-C of the Income Tax Ordinance, 2001 clearly discriminatory and oppressive adversely affecting the liberty and property of the Tax-payers selected for audit, whereas other similarly situated Tax-payers have been spared. It has been held in 2001 SCMR 256 that discretion becomes an act of discrimination when it is improper or capricious exercise or abuse of discretionary authority and the person against whom that discretion is exercised faces certain appreciable disadvantages which he would not have faced otherwise. In another case reported in 1999 SCMR 467, the hon'ble Supreme Court held that the Government is not supposed to discriminate between the citizens and its functionaries cannot be allowed to exercise discretion at their whims, sweet-will or as they please, rather they are bound to act justly. Improper, capricious exercise or abuse of discretionary authority is subject to judicial review. [Ref. 1992 CLC 219] (10) That the selection for audit on the basis of unknown PARAMETERS is mala fide. It has been instituted in order to nullify the higher Judicial Fora's decisions on the parametric selection for audit, which required that the Audit Policy should, not only 'be open, lucid, transparent and self-explanatory', but also it was made clear in 2013 PTD 1274 that--- "22. FBR shall ensure that in future, the Audit Policy carrying the risk of parameters and the mode and manner of segregation through risk analaysis for the purposes of parametric balloting is clearly laid out in a policy document. This will help avoid litigation and will also allay the apprehensions of the taxpayers which stem from lack of openness and clarity. It is clarified that we have not gone into the neutrality or the fairness of the individual risk parameters framed by the FBR as it was not challenged before us and can be looked into in some other case.". but instead of doing the needful, the F.B.R. has resorted to a blind and arbitrary mode of selection, which spells out the malicious intent of the F.B.R. In this way, not only the Tax-payers have been subjected to a process of audit without pointing out any fault on their part, but also the Courts of law have been debarred from making judicial review of the selection for audit. When malice is manifest on the face of an action, it becomes illegal and untenable, howsoever solemn it is. (11) That the hon'ble Lahore High Court, Lahore has unequivocally laid down in W.P. No. 5083/2015 that an Audit Policy cannot provide for selection without reasons. Relevant excerpt is reproduced hereunder:- "5.....Needless to say that any such Policy must be based on reason besides being fair, transparent, just and equitable.'. (at p. 4 of the Judgment), hence, the selection for audit without any rhym or reason is liable to be set at naught, being un-constitutional, illegal and without lawful authority. (12) That it is worth-mentioning that the hon'ble Lahore High Court has found the impugned method of selection faulty in W.P. No. 30253/2014, as 'some small tax-payers are selected for audit and potential cases are skipped'. The learned Judge also expressed his concern in that case that 'the Board it appears, is unable to evolve an undisputed and transparent policy for selection of cases for audit on parametric basis'. After expressing the above concern, the learned Judge observed that: * "Nevertheless, power of FBR to select for audit is not unbridled, the discretion has to be exercised justly, fairly and in transparent manner. The Apex Court in Government of NWFP through Secretary and 3 others v. Majee Flour Mills (Private) Limited (1997 SCMR 1804), while following its earlier decision in Amanullah Khan and others v. The Federal Government of Pakistan through Secretary, Ministry of Finance, Islamabad and others (PLD 1990 SC 1092), has reiterated the doctrine of "structuring the discretion". * "Needless to say that FBR is bound to structure the discretion vested in it under section 214C of the Ordinance and under parallel provision of Sales Tax Act, 1990 and Federal Excise Act, 2005. Federal Government, so far, has not been able to frame Rules to regulate FBR's discretion and FBR has not given any procedure. A taxpayer, selected for audit is left on the mercy of an unskilled audit officer for conducting audit. I am constraint to observe that FBR's tax year based selection for audit is tainted with an intention to achieve budgetary targets, therefore, is creating panic amongst the tax-payers, who are rushing to Courts after their selection. One of the reasons for challenging each case of selection under audit appears that department has not come out of the mind set of assessment under the Repealed Ordinance of 1979. After selection of taxpayers, the additions are made on gross-profit and parallel cases basis. Even estimations are made, which are alien to the new concept of amending assessment under Ordinance of 2001.". * " As ordained by Hon'ble Supreme Court, in the referred cases, FBR needs to frame Rules, keeping in view the doctrine of "structuring the discretion". If FBR fails to rationalize and regulate powers of selecting and conducting audit through Rules, the Courts might intervene more often than is necessary to undo an exercise of power, appearing arbitrary and capricious at times.". Adhering to the above findings of the hon'ble Lahore High Court, Lahore, the F.B.R. could not make selection of cases on the basis of PARAMETERS kept confidential even from the Tax-payers whose cases have been selected for audit. (13) Fixation of a percentage of 7.5% of the total return-filers in itself is a negation of any PARAMETERS. If any PARAMETERS would have been formulated, the said percentage could not have been fixed. All the taxpayers, irrespective of their number, if hit by the PARAMETERS ought to have been selected for audit. Selecting some of the Tax-payers falling within the fixed percentage of 7.5% and sparing the rest is not only against Article 25 of the Constitution, but also it is a mockery of fair trial and due process guaranteed by Article 10-A of the Constitution. (14) F.B.R.'s shyness to disclose the PARAMETERS smacks arbitrariness, malice and unreasonableness of the undisclosed PARAMETERS. Had the alleged PARAMETERS been fair, neutral, reasonable and just, there would have been no rationale behind their non-disclosure at least to a tax-payer whose case has been selected for audit. This mode of selection for audit is not countenanced by any provision of the Income Tax Ordinance, 2001, that's why, it has created a hue and cry among the selectees, and the F.B.R. is again facing writs against this audit, wherein the hon'ble High Courts would stay the audit proceedings, and the Department would again be helpless in generating anymore revenue from the audit of cases selected through the PARAMETRIC ballot. None else, except the policy-makers of the F.B.R., can be accused for this sorrow state of affairs, as they come forward with half-baked, rather totally raw and ill-based, policies, which fail to stand the test of judicial scrutiny, and are set at naught by the judicial fora. If the big guns of F.B.R. pay heed to the case-law being developed on the issue, and associate eminent tax practitioners in policy making, there will be little chance of facing any adverse situation like the one which the F.B.R. has been facing since the Assessment Year 2002-03. Though the military rule in our country has come to an end, and our statesmen are trying to make us believe that we are now living as a democratic nation, yet we, instead of reaping the fruits of democracy, are still prone to face the despotic decisions of democratic rulers. Everybody knows that democracy means government of the people, by the people, for the people. We should now be having every right to ask our rulers to eliminate the autocratic trends from the income tax law in vogue, and bring it in harmony with the norms of Islamic democracy where every citizen has an inherent right to challenge the decisions of the rulers adversely affecting the citizens.